Written by Nick Ackerman, co-produced by Stanford Chemist
Now that the majority of online brokers feature $0 commissions, it is important to focus on what features and services brokerages can offer to investors. One important discussion that has cropped up is participation in fund-sponsored DRIPs. These can allow investors discounted shares for participating in reinvestment plans. This happens when shares are trading at premium levels for a CEF. I would say the majority of CEF sponsors do have some sort of discounted DRIP available.
The only problem with this – some brokers don’t offer participation in these programs – some don’t even offer reinvestment at all. Additionally, the process for getting reinvestment going is different for different companies.
It is important to consider the importance of reinvesting. Even if it is just “manually” reinvesting. That would be taking the distributions as cash and investing where one sees fit. We have covered the topic of reinvesting at length in the past, several times. We have even covered what a fund sponsor DRIP is more broadly too, with examples.
To quickly recap, it is generally a win-win situation for shareholders and the fund sponsor. This is because shareholders receive shares (at a discount if trading at a premium, generally) automatically accumulating more shares that can then grow their cash flow for the next month or quarter. The fund sponsor benefits by retaining these assets. Their fees stay level or even grow if they are successful and growing assets.
That also means that since assets are remaining within the fund instead of going out as cash – the fund can continue to use those assets to potentially keep on earning for the fund. That benefits both the shareholder and the fund managers as more earnings can mean higher fees on managed assets. That reduced “erosion” in assets means a greater chance the distribution can be kept the same for shareholders too. Lower fees are always better, but advisory fees based on a percentage of assets managed means both shareholders and managers are aligned.
The most common type of discounted DRIP is reinvesting shares at a price of NAV or a 5% discount to the market price, whichever is higher. Though there are funds that reinvest distributions at NAV – no matter how much of a discount there is.
This is the case with the Cornerstone Strategic Value Fund (CLM) and Cornerstone Total Return Fund (CRF). From their Annual Report:
The method for determining the number of Newly Issued Shares received when Distributions are reinvested will be determined by dividing the amount of the Distribution either by the Fund’s last reported net asset value per share or by a price equal to the average closing price of the Fund over the five trading days preceding the payment date of the Distribution, whichever is lower.
Some of the information below will be taken from what we have gathered in our main chat board in the CEF/ETF Income Laboratory.
The broker I use, and I am the most familiar with is Fidelity. One of the benefits of Fidelity is being able to change the reinvestment option on or off yourself online. Being that I already use Fidelity, I knew the answer here but figured I would chat with a customer service rep to confirm.
(Source – Fidelity Live Chat)
That was the quick answer. To find the more lengthy answer we can go to their 42 pages of “customer relationship summary” that we all read very thoroughly.
For certain securities, dividend reinvestment may occur through DTC’s (Depository Trust Company) dividend reinvestment program (DRP). This plan may be utilized if an issuer offers reinvestment at a discount. Eligibility for a security to be enrolled in the DRP or the Fidelity dividend reinvestment program is determined by Fidelity and may change without notice. A DRP transaction will post to your account when the shares are made available to Fidelity by DTC. Such transactions are generally posted within 15 days after pay date.
TD Ameritrade (AMTD) is another broker that I have used in the past and am familiar with. They also make it very easy to change dividend reinvestment options online. They also participate automatically in sponsored plans. This can be found in their agreements, as well as a disclosure on the reinvestment enrollment screen.
TD Ameritrade may utilize Depository Trust Company (DTC) services for dividend reinvestment processing. These securities typically obtain more favorable reinvestment prices than the standard market reinvestment. While reinvestment for these shares typically post in 3-5 business days, it may take several weeks before payment is received from the issuer’s agent. You must be enrolled in DRIP on eligible securities prior to the record date of the distribution in order to obtain DTC reinvestment.
It should be important to note that AMTD is merging with Charles Schwab (SCHW). This should be closed any time now as they mention, “we expect the transaction to close in the second half of 2020.”
That merger being the case, a good time to bring up SCHW and their process. From a user of SCHW, they mention that it is possible to participate in sponsored DRIPs. Though it must be called in.
Schwab participates, at least w/ the big names. You must call and have them do it for you. Here’s the number:1-800-323-4332 #3.
Otherwise, from what I was able to find on Charles Schwab, one can turn off and on the reinvestment option – when one isn’t looking to participate in the sponsored plan.
They also include this in their agreements: “the Schwab StockBuilder Plan® is not affiliated with any reinvestment plan offered by any other entity. However, Schwab may choose, at its discretion, to participate in a third-party dividend reinvestment program.”
Interactive Brokers (NASDAQ:IBKR) is another popular brokerage. From what is available, changing dividend reinvestment is possible online (like the others.) However, they will not participate in sponsored DRIPs. Another user provided this finding below.
(Source – IBKR FAQ)
This can be unfortunate, but at least the option to reinvest dividends is still there.
E*Trade Financial (ETFC), another popular online platform, is also going through a merger. It is being bought by Morgan Stanley (NYSE:MS).
The E*Trade platform allows for dividend reinvestment to be turned on and off online.
A member shared their conversation with an E*Trade rep previously. In the conversation, it was found out that they do participate in sponsored DRIPs. That an investor would need to reach out with a phone call to a rep to turn this feature on.
… I asked my ETrade advisor about it back in Feb. He said,”I’m not aware of a ‘list’ but I do know that we can facilitate ‘discounted dividends.’ You will want to speak with the Service Team to see if there is such a list and get the account set up properly. You may contact them at 1-800-387-2331. “
Just for the millennials – a newer feature that Robinhood offers is being able to utilize dividend reinvestments. This can be turned off or on through their app. This wasn’t a feature when they originally launched. I have used Robinhood in the past, and this wasn’t a feature at that time. So, it is great to see that feature being implemented as it is quite important for “hands-off” type investors.
I wasn’t able to find information on participating in sponsored DRIPs in their agreements. I sent an email off to support; “Now that dividend reinvestment is an option, is it possible to participate in sponsored DRIPs from companies directly?”
In the past, I remembered waiting sometimes weeks for a response. This time, it was a rather quick response. That is the good news! The bad news, it was a cut and paste answer that didn’t fully answer the question as laid out above.
Thanks for reaching out!
With Dividend Reinvestment, commonly abbreviated as DRIP, you can automatically reinvest cash dividend payments back into the underlying stock or ETF. When you receive a cash dividend payment from a stock you own, this money will automatically be used to purchase shares (or fractional shares) of the same stock when Dividend Reinvestment is enabled.
Though this rep was friendly, it is unclear if an investor can or cannot participate in a sponsored plan. I’ve never had an off-putting experience with this platform before – even this response is more humorous than repelling.
Funds Worth Considering To DRIP For A Discount
To take advantage of the DRIPs offered by fund sponsors, a fund typically needs to be at a premium. Where we see this happen consistently is with the PIMCO funds.
Funds like PIMCO Corporate & Income Opportunity Fund (PTY) trade at rich premiums. Currently, the fund is at a 26.84% premium.
(Source – CEFConnect)
Though buying funds at premium levels are generally considered to not be a great idea, with PIMCO, this is their “normal” trading range. They offer other funds as well that are not as stretched too if PTY’s 26%+ premium is too rich for you.
The PIMCO Income Opportunity Fund (PKO) is currently trading at a premium of only 3.5%. This is “cheap” considering some of the other premium levels the fund has hit.
(Source – CEFConnect)
The PIMCO Income Strategy Fund (PFL) as well is another good example of a more “down to Earth” trading range. The current premium is at 4.48%.
(Source – CEFConnect)
Another area of the market that is worth considering to participate in the DRIP, is the CLO funds. They traditionally trade at premium levels as well. Though they don’t report their NAV daily. That makes it a bit more difficult to know exactly where a discount/premium might be regularly.
Most sources don’t get this information correct either. Take for example the above from YCharts; they are showing a NAV of $5.80 for Oxford Lane Capital (OXLC). In reality, they just estimated their NAV between $3.71 to $3.81 as of the end of August. Considering the share price of $4.32 and a midpoint of $3.76 – that puts us at almost a 15% premium to the current trading level.
Eagle Point Credit Company Inc. (ECC) has typically traded at premium levels in the past. However, at this time based off of the August 31st NAV midpoint of $8.54 the fund is at a slight discount.
These are all great options to consider turning a sponsor’s DRIP on for and to take advantage of discounts for reinvestments. Of course, this might not be right for everyone though. Individuals using all income to live off of might not be able to utilize this mechanism. Though it would be encouraged to at least try to reinvest something. The benefits of reinvesting distributions are a strong tool for investors.
DRIPs can be incredibly important for building wealth over the long term. Additionally, reinvesting through sponsored plans can allow investors to capitalize on discounts – thus, increasing their total share count than otherwise would be reinvested. Basically, a CEF can give you “free shares” if you can participate.
From our findings, Fidelity and TD Ameritrade offer the easiest access to this feature. They participate automatically when turning on the reinvestment plan. Though TD Ameritrade is being bought by Schwab, Schwab can also participate in these programs, but it is “at their discretion.” One will also need to call as it doesn’t appear to be an automatic feature.
Interactive Brokers just simply states that they do not allow members to participate. Of course, this reduces costs for the firm.
E*Trade and Morgan Stanley are about to merge, and they allow dividend reinvestment. It can be easy to turn off and on as well, on either platform. With E*Trade a phone call is required to request this to take place.
Investing at funds with large premiums might not seem appropriate – though there are several funds that this is their “normal.” The fact that one might be investing in these funds anyway, regardless of their premiums, might want to consider DRIPing to take advantage of “free shares!”
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Disclosure: I am/we are long PKO, PFL, OXLC, ECC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: This article was originally published for members of the CEF/ETF Income Laboratory on September 23rd, 2020.